Trade Executed

Yesterday we executed a trade that might be a surprise but was telegraphed once or twice. We bought a small cap domestic bank. As it is a small cap I am going to refrain from mentioning the name at the point as I don’t want to evolve into a small cap tout. Anyone interested in knowing the name can probably find out around July 11 if you take my meaning. If it immediately blows up I will be forthcoming about it.

I still believe the big banks are toxic for various reasons including the issue that JP Morgan (JPM) has been enduring for the last month or so and I believe the large banks will continue to struggle. If there is any area that can do well in the domestic banking group I believe it is with smaller cap companies.

The name we bought did not take TARP funds, appears to have very good loan quality and its balance sheet appears to be very healthy. Interestingly from June 1st, 2007 into the March 2009 low it only fell 32% (so it held up better than the S&P 500) as the Financial Sector SPDR (XLF) was falling 83%. I found a couple of different numbers for its beta but they were all below 1.00 and I expect it will continue to be a low beta hold which combined with a dividend yield in the high threes seems to make it the right type of hold if the market is done going up meaningfully for a while.

At the portfolio level our recent trades have reduced the volatility a little and increased the yield. At the sector level we have been very underweight financials and so now we are less so. Additionally we are now four to six years from the start of the crisis (depending on how you count) which is a long time. The worst crisis in 80 years will still take a while to sort out but a 2% exposure to a bank that appears to have managed around the full brunt of the event would seem to be a reasonable top down choice.

Another layer is deploying cash as the market generally has been working lower. We recently bought Kinder Morgan (KMP) when the market had dropped 4-5% from the recent high followed by yesterday’s trade. Any sales we might make to take defensive action due to a 200 DMA breach would be to remove high beta and these recent names are low beta.

3 Comments

Anonymous
on May 31, 2012 at 4:26 pm

Roger, you mention that 2013 is not going to be healthy for the market. Wouldn’t be better to add a big cap then a small cap in that expected market?Jeff from nyc

Trade Executed

Yesterday we executed a trade that might be a surprise but was telegraphed once or twice. We bought a small cap domestic bank. As it is a small cap I am going to refrain from mentioning the name at the point as I don’t want to evolve into a small cap tout. Anyone interested in knowing the name can probably find out around July 11 if you take my meaning. If it immediately blows up I will be forthcoming about it.

I still believe the big banks are toxic for various reasons including the issue that JP Morgan (JPM) has been enduring for the last month or so and I believe the large banks will continue to struggle. If there is any area that can do well in the domestic banking group I believe it is with smaller cap companies.

The name we bought did not take TARP funds, appears to have very good loan quality and its balance sheet appears to be very healthy. Interestingly from June 1st, 2007 into the March 2009 low it only fell 32% (so it held up better than the S&P 500) as the Financial Sector SPDR (XLF) was falling 83%. I found a couple of different numbers for its beta but they were all below 1.00 and I expect it will continue to be a low beta hold which combined with a dividend yield in the high threes seems to make it the right type of hold if the market is done going up meaningfully for a while.

At the portfolio level our recent trades have reduced the volatility a little and increased the yield. At the sector level we have been very underweight financials and so now we are less so. Additionally we are now four to six years from the start of the crisis (depending on how you count) which is a long time. The worst crisis in 80 years will still take a while to sort out but a 2% exposure to a bank that appears to have managed around the full brunt of the event would seem to be a reasonable top down choice.

Another layer is deploying cash as the market generally has been working lower. We recently bought Kinder Morgan (KMP) when the market had dropped 4-5% from the recent high followed by yesterday’s trade. Any sales we might make to take defensive action due to a 200 DMA breach would be to remove high beta and these recent names are low beta.